Jos. A Bank: The Shorts Suit Up

Troubled menswear retailer Jos. A. Bank (JOSB[1]) set its earnings conference call for Thursday, ending speculation as to when the suit seller would report first-quarter earnings.

But the timing of the release was pretty much the only source of suspense left, since we already know the results are going to be awful. The company said so itself when it dropped an epic profit warning last month.

And given the way JOSB didn’t settle on a date for the report until Monday, you have to wonder if the retailer has even more bad news to disclose.

After all, JOSB is having a classic retail problem. Inventory costs are rising but it’s having to slash prices — with even more sales, promotions and gimmicks than usual — to move that inventory.

That’s a margin-killer.

Anytime you’re a retailer in seasonal goods, fresh inventory is like fresh fish: There’s nothing better when it’s new, but if it hangs around too long it starts to stink.

For whatever reasons — the wrong fashions, steeper competition — too often JOSB finds itself stuffed with (more costly) inventory that’s starting to go bad. And the only way to move it out the door is by dropping prices and taking the margin hit.

Sure, unusually cool weather[2] no doubt hurt sales somewhat in the first quarter — the company said they were down 3% — but then the margin compression extends back into last year. Indeed, in the previous quarter, gross margin — or the difference between sales and cost of goods sold — dropped more than 4 percentage points year-over-year.

That’s a huge move, especially in the retail trade.

Wall Street was expecting a profit drop in the most recent quarter before JOSB said they were having a crummy quarter — but by no means were analysts prepared for the scale of the wipeout.

JOSB warned in mid-May that quarterly earnings would plummet to a range of 27 cents to 30 cents a share, down from 53 cents in the year-ago period. Wall Street had been looking for earnings to come in at 46 cents.

Now the average forecast stands at 29 cents a share, a profit the company may find hard to match, much less beat. Earnings have missed Street forecasts in two of the last four quarters.

And even if earnings can match or beat the latest estimates, the trajectory is still down, which never bodes well for the share price. From Ford Equity Research:

“While Jos. A. Bank Clothiers Inc.’s earnings have declined to an estimated $2.60 from $3.39 over the past 5 quarters, they have shown deceleration in quarterly growth rates when adjusted for the volatility of earnings. This is an indication of weakness that could lead to declining earnings.”

None of this is a secret, of course. The stock is up 5% year-to-date, lagging the broader market by 9 percentage points. And it’s done so with some nauseating volatility, whipping between a high of $48 and a low of $39, or a range of 20 percentage points.

The short sellers certainly smell blood. A whopping 23% of the float is sold short, according to S&P Capital IQ. Sure, if JOSB beats by a wide margin, the stock might pop on a short-covering rally, but that’s just gambling.

Beyond that, over a longer term, JOSB just looks like a bad idea — at least at current levels. The stock currently goes for more than 14 times forward earnings, or about 20% higher than its own five-year average. A premium like that is hardly warranted in the face of deteriorating earnings.

Heck, even Wall Street analysts — a famously optimistic lot — are down on the stock. Of the four analysts with recommendations on JOSB, three call it a hold and one has it at sell. Perhaps more damning, the average price target stands at $38, giving the stock an implied downside of 18% in the next 12 months or so.

JOSB has more than tripled since the market bottom of March 2009. If you enjoyed some of those gains it’s probably time to take some profits.

And if you’re looking to put new money to work in a bargain stock, keep looking. JOSB ain’t it.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.